The Rise of Marketplace Lending

If you’re looking for a hot sector to watch, marketplace lending (also known as P2P lending) should be on your radar. Transparency Market Research suggests that “the opportunity in the global peer-to-peer market will be worth $897.85 billion by the year 2024, up from $26.16 billion in 2015” Additional validation comes from Morgan Stanley. In a report written in 2015, they predict that such marketplace lending would command $150 billion to $490 billion globally by 2020. As an investor, sometimes it’s about being in the right place at the right time, and this looks like a great sector on the verge of a rise.

What is marketplace lending?

P2P lending was introduced about a decade ago by industry pioneers such as Prosper and LendingClub. Recently the term Marketplace lending has come into play, Renaud Lalplanche, CoFounder of LendingClub and CEO of Upgrade stated that the term “marketplace lending” could be less confusing to some that don’t understand the definition of P2P lending. Marketplace lending found an opportunity to disrupt traditional banks which served as the primary lending intermediary. Marketplace lending allows for borrowers and lenders to connect via the internet, and in many cases, the loan is constructed in a one to many fashion, similar to kickstarter. The marketplace lenders add value in many ways, chief among them, serving as a secure online platform, much like a broker, and secondly, as a way to price the riskiness of the borrowers. The marketplace lenders use sophisticated software to analyze various data points, assess a risk score, and allow for lenders (investors) to shop for the right borrower based on their own criteria.

Why does it work?

Similar to how Uber disrupted transportation as a result of traditional market practices not placing the customer at the center, lending has gone through this same transformation. In traditional lending, the bank charges a higher interest rate due to the significant overhead of maintaining bank branches, and the lender (or depositor) receives smaller amounts of interest, while the bank profits from the large spread. There was simply too much money going to a bricks and mortar intermediates without comparable value created for the parties involved.

The trends

A look inside LendingClub’s recent quarterly loan reports show a rise in loan volume, and as the most well known P2P lender, it serves as a bellwether for the industry. As LendingClub’s loan origination volume rises and falls, so does the industry.

How it fits into FinTech at large

FinTech investments, especially from venture capital firms are on the rise, and hovering around $15 to $20 billion globally per year. The below graph shows that marketplace lending is an important pillar, receiving 41% of venture investment. This trend is expected to continue, which will only further fuel marketing and technology budgets, pushing for additional first-time P2P borrowers and lenders.

Potential Red Flags on Marketplace Lending

Although marketplace lending has plenty to be optimistic for, it’s important to note that the industry faced scrutiny over the past few years. A couple of those reasons relate to lack of safeguards against fraud and a larger group of risky borrowers receiving funding for their loans. The former have led to a beefing up of security and system checks & balances. The latter may be following the lead of banks, which have shied away from riskier borrowers after the financial crisis of 2008. When an abundance of risk is on the platform, it’s only natural to expect higher default rates, which can provide bad publicity for the industry. As marketplace lending is barely a decade old, perception is still important. Finally, as a relatively new industry, regulation is still difficult to predict.

Authors

Brian Samson is a CoFounder of True North, where he leads strategy, operations, and delivery. Prior, he was on the leadership team for 3X startup exits. He holds an MBA from UCLA Anderson School of Management.